Answer to Question #188833 in Macroeconomics for Talha

Question

The infinitely-lived representative consumer has preferences given by

∞

βt (ln ct + γ ln lt) , t=0

where 0 < β < 1, ct is consumption, lt is leisure, and γ > 0. Each period,

the consumer has one unit of time endowment which can be allocated

between work and leisure. The production technology y = kαn1−α , ttt

0 < α < 1, where k is the capital input and n is the labor input. Capital depreciates by 100% each period.

(a) Determine the paths followed by consumption, leisure, capital and output in a competitive equilibrium.

(b) How are your results in part (a) affected by γ? Determine how γ affects the steady state levels of consumption, capital and leisure and output. Explain your results briefly.

Answer 1

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